<p>I recently found out that I received a fellowship that covers one year of full tuition. While this is very good news for the upcoming year, I also found out that since the amount of my total funds (original scholarship + new fellowship) will be greater than the cost of tuition for the academic year, then there could be tax implications. </p>
<p>I am wondering if I can avoid tax implications if I use the additional money to pay off loans/tuition from the previous two years of my program. The amount of these loans are pretty significant, and the extra money would go a long way to help reduce them. Further, it was not my idea to spread the original scholarship over three years (rather than provide it all in the first year). Instead the school did that automatically. But had they provided it all in year one (or years one and two) then there would not be any tax confusion today. </p>
<p>I was hoping to find someone that could help me find a way to [legally] use the money to pay off school fees without being taxed. Thanks in advance for your help.</p>
<p>That publication talks about what is taxable in a scholarship or fellowship. Remember books etc. may be covered.</p>
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<p>These expenses are taxable
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<p>When even room and board are not covered, I cannot see that they allow you to pay off past loans on tax free basis. Not an accountant or tax lawyer but I would assume that they would have mentioned it in the above publication if they allowed that. So I think you are out off luck, but others may want to weigh in.</p>
<p>Funny, I was just searching for the answer to this same question. I also had to take out loans for 2 quarters this year (2010-2011 school year), but I’ve been awarded enough scholarships to have a “cash out” in the fall (after tuition/fees/books are paid for the beginning of the 2011-2012 school year).</p>
<p>I guess the question comes down to… Are we talking a school year, tax year, if the money can only be considered allocated per quarter/semester, etc? </p>
<p>I probably won’t do it because it’s complicated and could cause trouble, but I’ve been thinking. If you use every red cent of your extra funds to repay student loans you borrowed earlier in the same tax year, kept excellent records, and did not claim a tax credit on the repaid portions of the prior loans, I can see how you could defend yourself successfully in the case of an audit. Can’t you just bundle all the allowed education costs and subtract scholarships awarded during the calendar year? Doesn’t seem unreasonable or out of line to me, although I freely admit it’s a gray area.</p>
<p>I’d like to add another question to this thread. I know that scholarships are “subtracted” from income on the FAFSA. But if there are additional scholarship funds beyond tuition, fees, and books, is that additional scholarship money counted as income (i.e., does the FAFSA only allow subtraction of scholarships that are used towards tuition, fees, and books). In my case, it’s only $1500-2000 potential taxable, but if that portion is counted as income, it could push me into a lower Pell and state grant award amount.</p>
<p>However, if you’re thinking of applying the extra to prior tax years, I would say that’s not allowed. It only begins to make some sense if you’re talking the same calendar tax year.</p>
<p>No, you can not use the scholarships and grants to pay off loans from previous years qualified education expenses in order to make the scholarships/grants tax free. Only qualified expenses that occur in the same calendar year (and sometimes the first 2-3 months of the subsequent year) as the scholarships/grants can be used to offset them for tax purposes.</p>
Any non taxable portion of scholarships/grants would not be included in the AGI in the first place and therefore are not reported on FAFSA at all. Only the taxable portion of scholarships/grants (used to pay non qualified expenses) are included in your AGI and are therefore included in the AGI you report on FAFSA. Then you report them in the question that asks for scholarships/grants included in income and the formula will deduct them from income before calculating your EFC. They will not impact your EFC.</p>
<p>So if I interpret correctly, it sounds like I could take the fellowship money and pay off my 2011-2012 year tuition (2011 Winter + 2012 Spring) and then use the other scholarship money (granted in August 2011) to apply to the 2011 Spring term tuition loans (term from January 2011 to June 2011). In that case, I’d be paying off tuition loans from the same calendar year in which I received the money.</p>